August 20, 2017

August 20, 2017

Wednesday’s churning action turned out to be the turning point for the market after the reflex relief rally we saw earlier in the week. As I discussed in detail in Wednesday’s report, the relief rally was a simple function of the phenomenon of alibied selling. The initial NoKo news the prior week was served up as the justification for the selling.

Once the rhetoric cooled off over last weekend, we saw the market rally sharply as it started the week off with a big upside gap-up move that took the NASDAQ back above the 50-day moving average. On Wednesday, however, I noted that the action had the clear look of churning action after a typical reflex rally and that was enough to tip us off to Thursday’s sharp sell-off.

Of course, that sell-off was attributed to news about the Trump Administration coming apart amidst the President’s alleged increasing isolation. In the same way that I tend to view the prior week’s “NoKo” sell-off as alibied selling, it seems to me that Thursday’s news was another round of the same thing but with a different news excuse.

Such is the nature of alibied selling, as I explained in Wednesday’s report. The result of the week’s selling is that the NASDAQ Composite Index is back below its 50-day moving average and holding roughly along the prior week’s lows. All in all, an interesting round-trip! Now, with the index closing just barely above the prior lows in the pattern, this could set up an undercut & rally move up closer to the 50-day line.

However, Friday’s action was still bearish as the index tried to rally early in the day and looked like it might reach the 50-day line, but reversed to close down and just below the mid-point of its daily trading range. Volume was higher as a result of options expiration.

The S&P 500 Index looks a bit more bearish as it failed to even hold above the prior week’s low by the time the closing bell rang. At that point the index was trading in the lower reaches of its daily trading range on higher options expiration volume.

The break off Wednesday’s highs was a sharp one, and there is certainly a chance that the index could reflex rally back up to the 50-day line. Given the volatility of this current market environment that would not surprise me, frankly.

In the same way that the Russell 2000 Index, not shown, provided the context for a market bounce early in the week as it held support at its 200-day moving average, the Dow Jones Industrials Index put a stop to Friday’s selling by finding intraday support at its 50-day moving average. This coincided with the NASDAQ undercutting its prior lows, and the entire market then bounced from there on an intraday basis.

By the close, however, the Dow was back down closer to the 50-day line and near the lows of its daily trading range on higher options expiration volume. Whether we see the index provide the context for a general market bounce to start the coming week or not is something we will only know when we see it. But for now, the overall index action looks bearish.

Tesla (TSLA) closed below its 50-day moving average on Friday, confirming the stock as a clear short-sale target at that point. However, it was a little more optimal to short the stock closer to the 370 price level, as discussed in recent reports. That coincides with the area of potential overhead congestion on the left side of the chart, and so far, that area has served as solid resistance.

The stock is therefore in a secondary short-sale entry position here using the 50-day moving average as a tight upside stop for that portion of the position. One could also use the 50-day line as a guide for a trailing stop for any short position that one initiated above the 360 price level. Note how the Weekly Bongo indicator at the top never turned a positive blue color throughout the June and July rally off the lows of early June.

Netflix (NFLX) never rallied much with the market early in the week as it slowly drifted into its 50-day moving average. On Friday, the stock tried to bouncer off the line with some vigor but simply reversed to close near the lows of the day on higher volume. While the prior BGU already failed several days ago, a breach of the 50-day line would trigger the stock as a late-stage failed-base short-sale set-up at that point.

Otherwise, if the stock can hold support at the 50-day line it may be in a lower-risk long entry position using the line as a tight selling guide. Theoretically, this could be tested here on the long side, but if it began to fail at the 50-day line one could reverse their position by flipping from long to short.

A two-sided approach to what is admittedly a two-sided situation for now, although on balance the action strikes me as bearish. For that reason, any rally off the 50-day line could run into resistance at the confluence of the descending 10-day and 20-day moving averages, depending on how the general market plays out from here.

Nvidia (NVDA) is retesting its 50-day moving average after the somewhat bizarre upside jack back up through the line on Monday. That move took the stock back above the 20-day exponential moving average, but the stock was obviously not able to hold the line amidst Thursday’s sharp market sell-off.

Hard to say whether this is a long or short right here. I might view a weak rally off the 50-day line and into the 10-day or 20-day lines as potentially shortable. For now, I see this as something to react to depending on where and how it goes from here. Further weakness would represent more evidence of a failing market environment.

Facebook (FB) closed below the 20-day exponential moving average on Friday on light volume, but at the same time made a feeble attempt at what is still a successful undercut & rally move. This occurred after the stock undercut the prior 166.85 low of the prior week and rallied back above it, closing 56 cents above the low.

Technically, this puts the stock in a long entry position using the 166.85 low as a tight selling guide per the usual rules for handling undercut & rally long set-ups. As confirmation of this, I’d like to see the stock regain the 20-dema over the next day or two at the most.

Notes on other big-stock NASDAQ names on my watch lists:

Apple (AAPL) is back down closer to its 20-dema after moving to new highs earlier in the week. A breach of the 20-dema would be bearish, while at the same time support at the 20-dema would be bullish, and would serve as a lower-risk entry position.

Alphabet (GOOGL) is back at last week’s lows, and remains extended to the downside. GOOGL is currently active as a late-stage failed-base (LSFB) short-sale set-up, and from here rallies into the 10-dma at 935.88, the 20-dema at 943.87, or the 50-dma at 956.63 would be references for potentially shortable rallies into logical areas of overhead resistance.

Amazon.com (AMZN) is also back at last week’s lows, but is too extended to the downside to be considered shortable here. It was last shortable on Tuesday of this past week when it ran into resistance at the 20-dema. From here, rallies into the 10-dma at 975.23, the 20-dema at 985.28, or the 50-dma at 992.82 would serve as references for potentially shortable rallies into logical areas of overhead resistance (maybe we can turn that into an acronym like “PSRILAOOR” for short!).

Microsoft (MSFT) is back below its 20-dema, which makes it shortable as a late-stage failed-base short-sale set-up using the 20-dema at 72.62 as a guide for a tight upside stop. Interestingly, I wrote about MSFT in my Wednesday report like so, “There is nothing currently actionable in the stock, although if the general market started to get into trouble again this could be considered shortable here using the recent highs at 74.42 as a very reasonable and tight upside stop.” Shorting near the highs on Thursday per that comment would have worked nicely following the ensuing sell-off into Friday.

Priceline Group (PCLN) is way extended to the downside and would need to get at least up as far as its rapidly descending 10-dma, now at 1891.57, before it might run into logical resistance.

Among the big-stock “PFAANNGM” leaders that would also include a “T” for Tesla, we can see that AMZN, GOOGL, MSFT, PCLN, and TSLA are all in failure mode, while NFLX and NVDA hover along their 50-day moving averages. Meanwhile, AAPL and FB are holding up either around or above recent breakout points, but should be watched for possible failures going forward. In general, the action of the current and former big-stock NASDAQ leaders tells us that things are not 100% copacetic.

The Chinese names are also an area where some crumbling is seen around the edges. We’ve already seen the breakdown in Netease (NTES), and this week JD.com (JD) joined the party when it busted right through its 50-day moving average on Thursday.

As I wrote on Wednesday, I tended to view rallies by JD “up into the 20-dema as short-sale entry points.” The bearish action that was initially indicated by the stock’s breakdown below the 20-dema after earnings on Monday morning culminated in a clean violation of the 50-day moving average by Friday.

Selling volume was heavy all week long, and JD can now be thrown into the growing pile of late-stage failed-base (LSFB) short-sale set-ups that are showing up in this market. The stock has been so weak it couldn’t even muster a temporary bounce off the 50-day line, and from here rallies back up into the line would likely present more optimal short-sale entry opportunities.

Momo (MOMO), not shown, is expected to report earnings Monday before the open, so we’ll see whether it acts more like JD after earnings or more like Alibaba (BABA), which gapped up on Thursday after reporting that morning before the bell. I don’t show the stock here on a chart as it is slightly extended, but Thursday’s buyable gap-up (BGU) move could have been bought near the 163.51 intraday low, leading to higher highs on Friday.

Weibo (WB), not shown, posted yet another all-time closing high on Friday as it remains impervious to the market turmoil. In fact, the stock was up three days in a row over the last three days of the week. Meanwhile, its majority shareholder, Sina (SINA), continues to act well, finding support at its 20-day exponential moving average on Friday.

SINA closed right above the 10-day moving average on Friday as volume declined to -37% below average. The stock has also ignored the market sell-off this week as it has essentially closed tight along the 10-day line all week long. For this reason, I view the stock as a go-to situation on the long side using the 10-dma as a tight selling guide, or the 20-dema as a wider selling guide.

WB and SINA at least demonstrate that despite the ugly sell-offs we’ve seen over the past two weeks, not everything is blowing apart, at least not yet. But if we’re looking for stocks that are holding up well and which might have a shot at moving higher IF the general market can find its feet, then WB and SINA look like good candidates.

Surveying what have now become my short-sale target groups, I note that the opticals all sit in beaten-down positions on their charts. Lumentum Holdings’ (LITE) and Applied Optoelectronics (AAOI), both not shown on charts, are still extended to the downside. Optimally, I would view a rally up to the 20-dema by LITE or up to 50-dma by AAOI as spots where I would most prefer to try and short them again.

Fabrinet (FN) remained a reasonable short-sale target on Thursday morning as it ran into intraday resistance at the 10-day moving average and then proceeded lower. By Friday the stock was back below the 200-day moving average on about average volume.

FN is expected to report earnings this Monday after the close, so I’m not going to short the stock into earnings. However, Friday’s close below the 200-day line puts the stock in a short-sale position here using the line as a guide for a tight upside stop. I’m more interested in seeing whether some sort of rally after earnings creates a short-sale opportunity at that time, so that is something to watch for after Monday’s expected earnings report.

We saw both Salesforce.com (CRM), and Workday (WDAY) break out on Wednesday, but those breakouts did not last long as both stocks immediately gave up the breakout ghost on Thursday as the general market got pounded. CRM is expected to report earnings on Tuesday after the close, so I am interested in monitoring it for any possible short-sale opportunities that might arise after earnings.

My guess is that WDAY and ServiceNow (NOW) will also likely move in sympathy to CRM after it reports earnings. For that reason, I will be watching all three stocks very closely after CRM’s report for any possible short-sale opportunities. In my view, the current chart positions of all three may make them vulnerable to base failures. In a continued bearish general market environment, this may be the more likely outcome for the group, but we’ll know for sure when it happens.

Video-game leaders Take-Two Interactive (TTWO), Electronic Arts (EA), and Activision Blizzard (ATVI) all continue to hold up reasonably well amidst all the general market selling. TTWO, not shown, continues to trek higher after its buyable gap-up (BGU) move after earnings two weeks ago. EA, meanwhile, is sitting in a base, as it ATVI, but both stocks are in positons that are arguably late-stage.

But, to paraphrase Forrest Gump, late-stage is at late-stage does, and you can’t call anything a late-stage base until it actually begins to fail. But if we look at ATVI’s weekly chart, for example, we can see some signs of fatigue in the pattern. Back in June the stock suffered some heavy weekly selling off the peak.

That was followed by a slow, trudging back up to new highs that didn’t go very far before two failed breakout attempts showed up. Since then the stock has been trundling around as it remains within the confines of its latest base. Notice that the action is a bit looser than it was earlier in the stock’s overall uptrend, despite the logarithmic weekly chart scaling.

If you investigate EA’s weekly chart, not shown, you will see that it too has been hit with a lot more weekly selling volume relative to weekly buying volume over recent months. For that reason, I am monitoring both ATVI and EA for possible LSFB situations if the general market continues to weaken. For now, TTWO remains the best-looking of the three and therefore not a stock I am watching for a possible failure, at least not yet.

Nutanix (NTNX) tried to push up and off the confluence of its 10-dma 20-dema and 50-dma on Thursday, but the general market mayhem pushed the stock back to the downside. It did hold at the moving average confluence to post a stalling pocket pivot.

On Friday, NTNX held tight at the moving average confluence as volume declined. As an Ugly Duckling type of situation, I tend to think the stock is less vulnerable to getting blasted on the downside relative in a continued market sell-off. I still like this along the moving averages using the lows of this past week as a selling, or the 50-day moving average as a wider selling, guide.

My guess is that if the general market can find its feet, then NTNX has a reasonable chance of pushing up and off of the moving average confluence. If the general market continues lower, then look for the 50-day line to serve as the next line of potential support.

Appian (APPN) is sitting pretty much where it was on Wednesday as it continues to form an obvious “L” formation. The stock is holding tight along the 20-day exponential moving average. Volume dried up to its lowest levels in the stock’s short history at -78% below average on Friday. While there is no guarantee that the L-formation will pan out into a “U” formation to complete the classic “LUie” pattern, the stock is in a lower-risk entry position right here along the line.

One could use the 20 price level or the 50-day moving average down at 19.46 as reasonably tight selling guides. Of course, as with any potential long idea, I want to be buying in sync with a market rebound back to the upside, and for now that remains the wild card as we move into a new week of trading action. Nevertheless, APPN remains on my long watch list.

GrubHub (GRUB) has been forming a tight flag since its powerful breakout after earnings two weeks ago. This is another name acting in a coherent manner in the face of some deleterious general market action. Note that on Friday GRUB undercut the prior 53.31 low of six days ago on the chart and rallied back above it on Friday.

Objectively this would put GRUB in a lower-risk entry position on the U&R long set-up, using the 53.31 price level as a tight set-up. If the general market gets into further trouble, however, look for the 20-day exponential moving average down at 51.67 as your next reference for support on the downside.

Notes on other names discussed in recent reports are below, some with charts, some without. Note that several of these stocks that remain on my long watch list are in fact acting well in the face of the selling over the past two weeks:

Alteryx (AYX) continues to find support at its 10-dma ad 20-dema with volume declining. On Friday, volume dried up to -53% below average, as the stock bounced off the 20-dema. For now, it looks like pullbacks to the 20-dema present lower-risk entry opportunities, using the 20-dema as a tight selling guide.

Arista Networks (ANET) is another name holding up well as it finds support along its 10-dma following its post-earnings buyable gap-up (BGU) of two weeks ago. If I were looking to buy this, however, I might be more inclined to take an opportunistic approach by waiting for a possible pullback to the 20-dema.

First Solar (FSLR) is in a three-week long flag formation with tight weekly closes. This gives it the look of a three-weeks-tight (3WT) formation, but the weekly price ranges are a bit wider and appear to run into resistance at the 50-day/10-week moving averages. On the chart below we can see that near-term the 20-dema serves as a reference for support, such that the stock becomes buyable there using that as a tight selling guide.

Palo Alto Networks (PANW) rallied up near its 50-dma on Thursday where it was shortable for a quick move back below the 200-dma. Earnings are expected on August 31st, so the stock remains a tactical short-sale target going into earnings looking for quick downside moves without holding through earnings next week.

SolarEdge Technologies (SEDG) is a little like FSLR as it forms a two-week flag formation here. The difference here is that SEDG posted a buyable gap-up (BGU) in early July and is now trading just above the 25.80 intraday low of that BGU day as well as the 20-dema at 25.81. This would put the stock in a lower-risk entry position using those two price markers as tight selling guides. Also, the closer one can buy to the 25.80 price level, obviously, the better.

Square (SQ) remains below its 50-day moving average, which is a bearish situation on its face. However, there is always the possibility of the stock posting a moving average undercut & rally (MAU&R) move if it can regain the 50-day line and hold it. Currently SQ is holding at the top of a base structure formed between early June and early July, so the potential for a move back above the 50-dma is a possibility IF we see the general market find its feet this coming week.

Tableau Software (DATA) posted a buyable gap-up two weeks ago after earnings and has held up in a short flag formation since then. It tested the 20-dema last week and held, and is now forming a tiny cup-with-handle type of formation here as it sits between the 10-dma and the 20-dema. For now, pullbacks to the 20-dema appear to offer reasonable, lower-risk entry points in what is a bullish pattern.

Yelp (YELP) is extended after posting a buyable gap-up (BGU) after earnings two weeks ago. The stock has held tight and is currently holding along the 10-dma, Pullbacks that undercut the prior 40.70 low of six days ago and/or test the 20-dema would offer your best, lower-risk entry opportunities, although the current pattern looks bullish.

For newer members: Please note that when I use the term “20-day moving average,” “20-day line,” or “20-dema” I am referring to the 20-day exponential moving average. I use four primary moving averages on my daily charts: a 10-day simple (the magenta line), 20-day exponential (the green line), 50-day simple (the blue line) and 200-day simple moving average (the red line). On rare occasions, I will also employ a 65-day exponential moving average (thin black line).

My current market work shows me that a bullish or bearish case can be made for individual stocks based on their specific price/volume action and chart patterns. I can find stocks that look quite bearish, like the opticals or some of the big-stock NASDAQ names, but I can also find plenty of bullish patterns. These bullish patterns and set-ups also appear to be holding up quite well on days where we’ve seen the market take some selling heat.

The current action and positions of the indexes does not provide what I would call predictive value, and I can see the potential for movement in either direction. If the Dow holds at the 50-dma, then that certainly sets up the context for a reaction bounce from here, particularly since we also see the NASDAQ Composite holding an undercut & rally move that it posted on Friday, albeit just barely.

In a robo-market dominated by algos and other machines, it perhaps helps to think like an algo. The indexes over the past two months have displayed volatile price action, as is quite obvious from the charts, and the machines seem to come in at the extremes in either direction. That is why the Ugly Duckling set-ups, like the U&R, tend to work well.

It is also why my VIX strategy, which I generously discuss on Twitter (J), tends to work well when the market reaches a peak. When the market reaches a high, I am always monitoring my “620” five-minute intraday for turns that might coincide with inflection points in the major market indexes. An example is the buy signal that hit on Thursday on the 620 chart of the ProShares Ultra VIX Short-Term Futures ETF (UVXY), below.

Right at the open the MACD lines crossed, which I will take as a buy signal with a very tight stop of 10-20 cents. I don’t care if I get quickly stopped out and the UVXY turns back to the upside, as I will then look for secondary entries. The idea is to take tiny losses when the signals are wrong in exchange for catching a sharp upside move.

That initial MACD buy signal resulted in a rapid move to the upside, which got extended quickly as the MACD lines separated by a relatively wide margin, what I call a MACD stretch. This occurred just after the market open around 7:00 a.m. my time here on the West Coast. This was a nice price move and one that I would look to sell into based on the MACD stretch.

The UVXY then broke down from there, but later set up on what was a full “620 Buy Signal” where the MACD lines crossed in synch along with the 6-period exponential moving average crossing above the 20-period moving average. I will use isolated MACD crosses as entry signals most of the time, looking for a full 620 buy signal to confirm. At around 8:30 a.m. that is exactly what happened, and the UVXY never looked back for the rest of the day.

What happens on the UVXY 620 chart, however, must always be interpreted in conjunction with what I’m seeing on the market index charts. If the indexes have been rallying for several days, and the VIX is plumbing what have been historical lows recently, then that is the time to start watching the UVXY 620 chart.

This is a very active method that I use to trade the $VIX, and requires some courage as well as the ability to put several puzzle pieces together since the 620 chart alone is not intended as a mechanical trading system. My advice to anyone who finds this of interest, and they are an experienced trader, is to first paper trade the UVXY using the 620 chart to get a feel for how it works.

I would also caution that this might work well in this environment simply because of the historically (some might say ridiculously) low VIX levels seen during what is basically a perpetual motion robo-market rally. In my view, the extremely low VIX puts your risk at a minimum, while the tendency for the VIX to decompress and rocket to the upside makes the risk-reward equation for this type of trade very favorable.

Eventually this market will top, and we will see a real bear market. Whether that is happening now or not is something that cannot be known with 100% certainty in real-time. What I do know is that we’ve seen two rounds of alibied selling hit the market over the past weeks, once on the NoKo news and once on the “Demise of Trump” news, both followed by ultimately ineffective relief rallies that are the signature of the alibied selling phenomenon.

The only defense is to maintain your trailing and absolute stops for any existing long positions. In addition, only look to take new long positions when a nearby level of support can be determined and then used as a tight selling guide.

Meanwhile, those who like to sell short, and know what they’re doing, can go after the weaker former leaders as appropriate. Regardless of whether one plays this market long, short, or both ways in bifurcated fashion, nimble feet and an open mind will be your best allies.

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held no positions, though positions are subject to change at any time and without notice.